Hedge Funds More than Fine in '09

Taken at face value, historic index figures suggest that even an average hedge fund manager can easily beat the stock market while taking less risk. Since 1990, a weighted index of hedge funds has returned around 12 percent annually — about four percentage points more than the returns for the Standard & Poor's 500-stock index — with just half the volatility, according to Hedge Fund Research.

On closer inspection, these claims look suspect. Research published in late 2007 by the Princeton professor Burton G. Malkiel showed that many hedge funds simply stopped reporting results after they became embarrassing. For funds that ceased reporting, the average monthly return in the six months before they did so was -0.56 percent. That contrasts with an average monthly return of 0.65 percent during their reporting lives.

For another piece of evidence, consider Hedge Fund Research's investable Global Hedge Fund Index. Because this tracks real money invested in hedge funds, reporting vagaries ought to be less of an issue. Sure enough, the index has underperformed Hedge Fund Research's broader theoretical benchmark in each of the last seven years, typically by a meaningful margin. In 2009, a recovery year for hedge funds, the investable index rose around 13 percent year compared with 19 percent for Hedge Fund Research's voluntarily reported index.